Few people are eager to ponder their own death or its aftermath. As a financial planner and a practice transition specialist, respectively, the authors have seen the unfortunate effects of doctors' reluctance to ponder — and plan for — their sudden death or disability. We have pooled our collective experience and knowledge into this article series to share what we know and what you need to know.

In the September-October 2005 issue of this journal we introduced case studies based upon people with whom we have worked. It is our hope that reading about their circumstances will raise some red flags in readers' minds. We also hope that when you reach the end of this article, you will feel empowered with the information presented and you will act on our recommendations.

Case Studies Revisited
Remember Emily? At first glance she is doing quite well. At 35, she has her own practice and supports her husband and three children with her $325,000 take-home salary. But among the demands from the loan for her practice, a home mortgage, and car and student loans, she is in debt in excess of one million dollars. Emily is young and healthy. She has worked hard at her career but has not allocated monies for life insurance, disability insurance, retirement, or an emergency fund.

 At 60, Carl is ready to retire. Unfortunately, he held onto his practice too long. The associate he was grooming to take over grew impatient and has moved on. Carl's wife, Sue, just went back to college. Carl has $500,000 in a 401(k), but for the lifestyle with which he and Sue are comfortable, that can't last long.

If Emily or Carl were injured and could no longer practice, or if they died, what would happen to their families? How would Emily's husband support himself and their young children? Could Carl's wife still pursue her degree? These are sobering scenarios, but they are not out of the ordinary. These doctors are happy, successful — and surprisingly vulnerable. For Emily and Carl, if the doctors died, their families would lose their loved ones and their lifestyles.

The Unthinkable
We will begin with the dark stuff. If you died yesterday, could your spouse easily find your:
• bank statements; brokerage statements; charge account bills
• birth certificate
• life and health insurance policies
• retirement asset statements
• will and living will
• power of attorney
• Social Security card
• marriage certificate?

If you answered "no" to any of these questions, it is small comfort to know you are not alone. We're not trying to scare you. Rather, we simply want to illuminate the difficulties you may be heading for by failing to have a plan.

Planning When the Doctor Is Well
Deliberate and careful planning will go a long way in securing your family's future. There are many things you can do today to ensure that if anything happened to you, your family would be taken care of. To that end, please read on for valuable information about protecting your assets and planning for the unthinkable.

Life Insurance
As you know, insurance is a gamble, and, unfortunately, you have to bet against yourself. The question: how much coverage do I need? The answer: probably more than you think. A rule of thumb one often sees for a young doctor is six to eight times your annual income. But there are many factors to consider, and you, your spouse, and your financial planner can choose an amount of coverage that suits you based upon your assets, your liabilities, and your stage of life.

There are two types of insurance: term life insurance, and "everything else". Term life insurance is basic, inexpensive, and it covers you for the agreed-upon term as long as you pay premiums. Other policies have a cash value (whole life, variable life, universal life, etc.). These kinds of policies have a significantly higher premium, but you are not just paying for insurance. Your policy is also an investment. Sometimes doctors are attracted to these types of policies. However, when they cannot afford the high monthly premiums that come with cash value policies, they often opt for less coverage. This is a gamble you cannot afford. If you choose cash value life insurance, it is best to supplement with term insurance in addition to the cash value policy than to be left with too little coverage.

Individual Disability Insurance
I am often asked, "How much disability coverage should I have?" There is no such thing as 100% disability coverage, as insurance companies understand the motivating force of incentives: if there were no incentive to return to work, many people simply would not. The rough rule of thumb is to get as much disability coverage as you can qualify for.

 Disability insurance is more complicated than life insurance, and often people do not understand what they have purchased. Any individual disability policy can have only two of the following three characteristics: low premiums, high monthly benefit payouts, favorable definitions.

   Assuming that your disability renders you unable to practice, the following provides a brief synopsis of definitions.
1. Own occupation. The policy will pay your full monthly benefit even if you are capable of working but cannot practice dentistry. (This option is clearly desirable. However, it has become less available.)

2. Own occupation if not engaged.  Your premiums are lower than own occupation plans. If you choose to work, you will receive decreased monthly payments.

3. Any occupation.   If the insurance company thinks you can do something else, regardless of whether you agree or not, your monthly payments will decrease based upon the insurance company's assessment of your earning potential in a different sphere. (This isn't ideal, but again, you will pay lower premiums.)

4. Non-cancelable. Your policy cannot be cancelled, and the insurance company cannot raise your premiums.

5. Guaranteed renewable. Your policy cannot be cancelled, but the insurance company can increase your premiums if they raise premiums for the group to which you belong — for instance, dentists practicing in Minnesota.

Group Disability Insurance
Many doctors have the bulk of their disability coverage through a dental association, their employers, or their practices. Group policies are less expensive than individual policies, and there is nothing inherently negative about them. However, doctors are often less familiar with the terms of their group policies and can run into problems with the definitions.

 Group policies are not owned by the doctor, they are owned by the insurance company. Several years ago the Minnesota Dental Association encountered difficulty when the insurance company decided to cancel the group policy. When the MDA went shopping for a new insurance provider, the doctors had to go through underwriting again and produce their health records. Naturally, certain doctors had developed conditions or incurred new risks since the last time they went through underwriting, and the new provider chose to exclude some of the doctors who had been part of the previous group policy.

Group disability coverage definitions often do not cover disability because of nervous conditions or mental illness. They also may have variable definitions, such as own occupation, for a certain amount of time; for example, two years. In this case, you will receive your monthly payments for the first two years you are unable to practice, and then the policy will shift to an any occupation definition. Many group policies have a two-year window on claims. In the case of a degenerative disability, for example multiple sclerosis, you have two years from the onset to file your claim. In this example, you may still be able to practice when you file your claim, so you would decrease your working hours and receive a partial pay-out. If over time you are no longer able to practice, you cannot re-file with the insurance company to receive your full monthly benefits. Finally, group policies sometimes do not account for inflation and cost-of-living increases, whereas with individual policies you can choose to include this important feature.

If you only have group coverage, make sure you know the definitions and terms. If you combine individual policies and group policies, there is the potential for being over-covered. Your individual policy will pay out your full benefit, but if the combination of individual and group policy pay-outs exceeds a certain percentage of your pre-disability income, the group policy may decrease your benefits to offset your total payments received. Understanding how your policies fit together, and working with a disability insurance specialist, will help insure that your overall disability coverage is right for you.

What About My Practice?
Your dental practice plays an important, active role in your community. You honor that role and know that your business is a valuable asset. It is also a perishable commodity. When you are no longer practicing, the value of your dental business will decline from its peak value to the value of used dental equipment in about six months. In order to provide for your staff and ensure the continued high quality care of your patients, it is imperative thatyou have a succession plan that can be quickly activated if something happens to you.

Always remember that the goal is to find another dentist to take responsibility for the practice ASAP. We have encountered lawyers and accountants who are so focused on pursuing an orderly process that the practice transition takes weeks or even months! In the meantime, the value of the practice is in a steep downward spiral. This is a situation where you need someone who has a streamlined process in place so decisions can be made quickly to preserve the value of your practice.

Your succession plan is only as strong as your relationships. You may choose to bring on an associate, a partner, or prepare an incremental plan for turnover to another doctor. You can create a group of supportive colleagues who may act as interim replacements for your practice, and you can offer to be the same for them. When choosing your supporting doctors, it would be wise to team up with doctors who practice at least ten miles away from your office. This way, your patients will not permanently gravitate to another local practitioner, and the value of your practice will remain intact. Whatever your plan, make sure you put it in writing.

If you choose the associate route, remember that the value of the practice is primarily in the relationships with the patients, which convert into cash flow. If you have an associate working in your practice with no restrictive covenant, the associate will soon have the relationship with the patients and the ability to open up a practice next door to yours and take with him or her much of the value of your practice! A good associate contract can prevent this potential for loss.

Good recordkeeping is an essential component to any successful business. If the doctor dies, it can sometimes take weeks just to find the most important paperwork.

At any time, you, your accountant, and your practice manager should be able to easily locate the following paperwork for the past three years: profit and loss records, tax returns, production reports, fee schedule, list of procedures, and list of hard assets.

Business Overhead Insurance
Life and disability insurance cover your income; business overhead insurance covers your practice. It will keep your office doors open if you become disabled. Business overhead insurance is relatively inexpensive, and the premiums are tax deductible. It covers all of the non-income generating aspects of your business: your lease, front office staff, and, in some cases, it will help pay a replacement locum tenens dentist while you are out of the office.

Finding Good Help
In the event of your death, you would not want to leave your spouse guessing about your wants or wishes. Once you make plans with your trusted lawyers, accountants, and financial planners, you will have the peace of mind that they will be there to help ease the burden of paperwork and difficult decisions during an emotionally wrenching time. A transition specialist can help you draft and activate a succession plan for your practice, leaving one less thing for your spouse to worry about.

For the Surviving Spouse
Lawyers will handle your estate and trust needs, and if the doctor dies, the lawyer is the first person you should meet with. We suggest bringing a friend or family member to the initial meeting. A lot of information will be covered, and it is difficult to take it all in alone. At the end of the meeting, ask your lawyer to send you a follow-up letter summarizing what was discussed and what you are responsible for. Share the letter with your "witness" to make sure everyone is on the same page. Your lawyer should also provide a letter of engagement that outlines the costs to settle the estate.

Working with an accountant with experience in personal and estate returns will facilitate a smoother transition process. There will be several forms to file: federal estate taxes, state inheritance tax, federal and state income taxes, and personal federal and state taxes, to name a few — and you will need to transfer all joint assets into your name. Again, request an estimate of fees and timeline from your accountant. This process should take no longer than nine months.

Your financial planner can help handle your personal assets: home, real estate holdings, investments in cash, bonds, mutual funds, stocks, practice proceeds, retirement assets, etc. They will also help you with liabilities such as your mortgage, home equity loans, and other debts.

Finding Better Help
With many couples, it is the dentist/spouse who will have chosen the advisors. Although this spouse will have carefully selected these professionals, it is essential that the surviving spouse is comfortable working with these people. To a surviving spouse, our best advice is to remember these people are now working for you. We all have personal preferences, and if you are unhappy with anyone working for you, you should not hesitate to select replacements you prefer. Ask plenty of questions, and trust your instincts.

 Among the questions you might want to ask when interviewing for a new financial advisor are:
• What experience do you have?
• What are your qualifications?
• What services do you offer?
• What is your approach to financial planning?
• How will I pay for your services?

The website of the Certified Financial Planner Board of Standards, www.CFP.net/learn, is a resource for financial planning offering useful information for visitors.

What to Do Now
Share this article with your spouse and have an open discussion about your finances and your practice, and outline the kind of plan you will need. Meet with professional advisors, make your plan, then enjoy your life with confidence.
 

The Nine Immutable Laws of Investing

1. Keep track of investment results.
2. Pay fewer taxes.
3. Consolidate your holdings.
4. Make an investment blueprint and stick to it.
5. Set up an automatic investing plan.
6. Pay attention to the expenses on your investments.
7. Do not pay too much attention to the expenses on your investments.
8. Diversify.
9. Make sure your financial advisor acts in your best interest.